Laying off employees and terminating
A business’s finances sometimes weaken, and the owner has to think about how to get through the situation. It is essential to find solutions that do the least possible damage to the business’s ability to operate in the future.
In businesses with employees, changing working hours and laying employees off are by far the most used way to cope with temporarily quieter periods. If the worst comes to the worst, letting people go is another option.
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Lay-off and termination options
In what ways can an employer react to changes in a company’s financial situation?
If the finances of a business with employees are in temporary difficulties, the owner is forced to think about how to survive the situation. It is essential to find the kinds of solutions that do the least possible damage to the business’s ability to operate in the future. As a business owner, when weighing up the different options you should consider how quickly you think things will recover, and whether your business could benefit from permanent changes. You should react to poor financial performance as early as possible.
A solution often presented is terminating employment on production and financial grounds, or, as an alternative, laying them off. It is true that the other options available under the law are limited, but you should consider them too, particularly if your business’s financial difficulties are temporary.
One way to cope with quieter periods or more permanent drops in available work is to rearrange working time.
If, as an employer, you are no longer able to offer full-time work, on certain conditions you can change the job to a part-time one. The employer and employee can agree on the switch to part-time work, or the employer can unilaterally change the working hours clause in the employee’s contract. The job can also be temporarily made part-time as part of a part-time lay-off.
Under the Employment Contracts Act, if you as an employer have financial or production grounds for terminating employees, you can unilaterally make employment contracts part time. Making people part time is thus an alternative to terminating their employment. If you regularly employ at least 20 people in your company, you must conduct negotiations pursuant to the Act on Co-operation within Undertakings before making staff part time. In addition, you must give proper notice of the change: the employees’ jobs only become part time after the notice period.
Lay-off can also be part time
In a situation where making the work part time permanently is unnecessary, you can also lay people off part-time. You can lay employees off part-time by shortening their daily or weekly working hours. The lay-off can be either in force until further notice or for a fixed term. A fixed-term lay-off may last no longer than 90 days.
An employee who is laid off part-time can receive adjusted unemployment allowance. In these situations, the reduced working hours are partially compensated from the unemployment security system. Adjusted unemployment allowance depends on how many hours the employee works while laid off. The general rule is that part-time laid-off employees can receive adjusted unemployment allowance when their working time is no more than 80% of the applicable working time in the sector.
The Annual Holidays Act permits relative wide discretion for timing annual leave. Generally, employers time annual leave at the quietest part of the holiday season. Under the Annual Holidays Act, the employer and employee can also agree on annual leave in a period that begins at the start of the calendar year in which the holiday period falls, and which ends the following year before the start of the holiday season. That means annual leave can begin before the holiday season if the employer and employee so agree. This may be useful for the business, as the employee’s work can be used during the holiday season if there is a spike in demand.
In a financially difficult situation, remember too that even if an employee’s employment ends before he or she is entitled to take annual leave, the Annual Holidays Act allows the opportunity to agree on using all annual leave days accrued before the employment ends. If both parties agree, the employee can then take all the annual leave days he or she accrued during employment before the employment ends. In such a case, you, the employer, do not have to pay holiday compensation. You should check the collective bargaining agreement in your sector to see if you would nevertheless have to pay holiday bonus in such a situation. The practice varies by collective bargaining agreement.
Read more: Annual leave
The employer and employee can agree at any time to change the terms of employment. However, they cannot go below the minimum statutory terms or the terms in the collective bargaining agreement which binds the employer. In a difficult financial situation, both parties can thus agree on reduced salary, but not one lower than the minimum set out in the collective bargaining agreement. This rule also applies to other minimum terms of employment such as holiday bonus and overtime compensation. You should always agree on changes to terms of employment in writing.
Changing the terms of employment by unilateral decision of the employer
The Employment Contracts Act only refers to unilateral change of terms of employment by an employer once. On the basis of this regulation, you as employer can unilaterally make the job part time with observance of a notice period, if the financial and production grounds for termination laid down by the Employment Contracts Act exist. The Supreme Court has ruled on an employer’s right to reduce employees’ salaries instead of terminating employment.
Supreme Court ruling 1996:89. The company’s financial capacity for offering the employee work on the former terms had reduced to the extent that the company would have had the right to terminate employment. The company then unilaterally decided to reduce employees’ salaries, after a notice period, instead of dismissing the employees, as even the reduced salaries met the minimum level in the sector’s collective bargaining agreement. Additionally, this action, along with other available restructuring actions, was deemed necessary to ensure viable company operations.
The decision practice of the Supreme Court has stressed that salaries may be reduced as an alternative to termination of employment. There has also generally been a requirement for the employer to take other action to secure continued company operations. In practice, salary reduction is possible in situations where, in conjunction with other restructuring actions, it is deemed necessary to ensure viable company operations. The salaries must be reduced using the notice principle and with observance of a notice period. Salaries cannot be reduced beneath the minimum in collective bargaining agreements, and employees must be treated equitably.
Laying staff off means temporarily not giving them work or paying them wages. An employer can decide to lay people off alone, or the employer and employees can jointly agree on lay-offs. However, employment contracts remain in force.
If the statutory conditions are met (see below), the employer can lay off an employee either temporarily or until further notice. You can lay people off so they do not work at all, or you can reduce employees’ working time, as specified by law or in their contracts, to the extent essential given the grounds for the lay-offs.
If you regularly employ more than 20 people, you must hold negotiations per the Act on Co-operation within Undertakings before you decide on necessary measures, such as lay-offs.
An employer may lay off an employee if
- the employer has financial or production grounds for terminating the employment contract, or
- the work or the employer’s opportunity to offer work has decreased temporarily, and the employer cannot reasonably assign other suitable work or training matching the employer’s needs to the employee.
“Temporarily” here means a reduction in work or opportunity to offer work that is judged to last no more than 90 days.
An employer may only lay off a fixed-term employee if this employee is substituting a permanent employee and the employer would have had the right to lay the permanent employee off, had he or she been working.
A shop steward, non-union elected representative or occupational safety and health representative may only be laid off when his or her work ceases completely, and he or she cannot be offered other suitable work or training.
The employer must present the employee with an advance explanation of the grounds for the lay-off, and its estimated extent, implementation, commencement and duration. If the lay-off affects a number of employees, the explanation may be given to the employees’ representative or the employees jointly. The explanation must be presented without delay as soon as the employer becomes aware of the need for lay-offs, and it must be based on the information the employer has at the given time.
After providing the advance explanation, and before the lay-off notice, the employer must give the employees or their representative a hearing on the explanation.
It is not necessary to present an advance explanation if the employer is required under another act, agreement or other provision binding the employer to present a corresponding explanation or negotiate on the lay-offs with the employees or their representative.
Under the Employment Contracts Act, an employer must personally give an employee 14 days’ notice of the start of a lay-off. However, as an employer you should always check whether your own collective bargaining agreement sets out a longer lay-off notice period than 14 days.
If the notice cannot be given in person, it can be given by letter or electronically with the same notice period.
The notice must include the basis for the lay-off, its start date, and duration or estimated duration. A notice served by letter or electronically must reach the recipient 14 days before the start of the lay-off. If the letter is sent by registered post, it is considered to have arrived on the seventh day after being sent. However, the general rule is that the notice is given to the employee in person.
The obligation to give such a notice does not exist if, on account of some other absence from work, the employer is not subject to an obligation to pay the employee for the entire lay-off period.
The representative of employees to be laid off must be informed of the notice. If you lay at least 10 employees off, you as an employer must also notify the unemployment authorities of this, unless you have another corresponding obligation under the law.
Many collective bargaining agreements have specific clauses on when a lay-off that has already been announced can be moved or interrupted because of a short period of work which arises.
At the employee’s request, the employer must provide a written lay-off certificate giving at least the reason for the lay-off, the start date, and the duration or estimated duration of the lay-off.
At the end of an indefinite lay-off, an employee is obliged to return to work within seven days of the announcement and being called back to work. The employee has the right to accept other work during the lay-off. As an exception to the shortest 14-day notice period, the employee has the right in such cases to give just five days’ notice to another employer he or she does work for during a lay-off.
A fixed-term lay-off ends at the end of the fixed term unless the parties agree on an earlier return to work.
Employees are entitled to terminate their employment contract without a notice period during a lay-off. If the employee knows the lay-off end date, this right does not apply for seven days preceding the end of the lay -off period.
If the employer wants to terminate employment during a lay-off, he or she must pay the employee full salary for the notice period. If the employee has been laid off using a law-based or contract-based lay-off notice period of more than 14 days, the employer may deduct a pay sum due for 14 days from the pay for the notice period. In practice, this 14-day pay can only be deducted if a notice period of more than 14 days included in the applicable collective bargaining agreement is used. However, most collective bargaining agreements do not contain such clauses.
If a lay-off has lasted continuously for a minimum of 200 days and an employee terminates his or her employment contract, the employee is entitled to his or her pay for the notice period as compensation, as if the employer had terminated employment. If the employee terminates employment on this basis, he or she is not obligated to do work during the notice period.
When the continuous 200-day period above is measured, annual leave or short-duration work offered to circumvent the rules do not count. Neither a collective bargaining agreement or a mutual agreement between employer and employee can be used to make an exception to the 200-day rule.
The Supreme Court has ruled on the counting of the 200 days in decision 2015:43 in situations where the lay-off was done by reducing working hours. According to the Supreme Court, a part-time lay-off is generally not a continuous lay-off. However, the lay-off is considered to be continuous if the work done during the lay-off forms only a very small proportion of the employee’s regular working hours.
If the lay-off was done by shortening working hours, the 200 days mentioned above only start to be counted if the employee was at work for a very small proportion of his or her regular working hours during the lay-off.
A company regularly employing at least 20 employees must apply the procedures in the Act on Cooperation within Undertakings when laying employees off.
Find out more in the section on the Act on Cooperation within Undertakings (in Finnish)
The Employment Contracts Act lays down the procedure for ending employees’ employment on financial and production grounds.
Before starting the procedure to end people’s employment, you should ensure that the financial and production grounds for doing so exist.
Under the Employment Contracts Act, an employer can terminate an employment contract if the work on offer has diminished substantially and permanently for financial and production reasons, or for reasons due to the employer reorganizing its operations. You cannot terminate an employment contract if you can reassign or train the employee for other duties. As an employer, you do not have grounds for termination if immediately before or after termination you employed a new employee for similar duties, despite your operating conditions not having changed during the equivalent period. Nor do you have grounds for termination if you have reorganized your operations, but the actual amount of work has not decreased.
As an employer, before you terminate an employment contract on financial and production grounds you must explain the grounds for and alternatives of termination as early as possible. At the same time, you must find out from the TE Office what services are available for the unemployed. You do not have to explain these things in writing, but that could sometimes be useful to prove both that you have grounds for termination and that you met your obligation to provide prior explanation.
If you wish to terminate several employees’ employment, you can give this prior explanation to their representative, such as a non-union elected representative, shop steward, or you can give it directly to the affected employees if the employees have not elected a representative.
There is no limit on how far in advance you should give employees prior explanation before giving them notice of termination. However, you should give prior explanation as early as possible.
You must give an employee notice of employment termination personally. If this is not possible, you may send the notice by email or post. In this case, the notification is considered received by the recipient no later than on the seventh day after it was sent. If the employee is on annual leave or on a leave of at least two weeks in order to balance out working hours, termination of employment based on a letter or email is not regarded as delivered until the date following the end of the leave, at the earliest.
It is worth specifying the grounds for terminating employment in the termination notification. In any event, you must tell an employee, in writing, the date of termination of employment and the reasons for it, on request. You can define the reason for termination briefly, such as: deterioration in company finances, reduction in demand or reorganization of work.
You should also review the options for termination before terminating employment. In practice, a small business’s options are often limited. They can include offering other work, training employees for new tasks, or making employees part-time.
It is a good idea to make two copies of the termination notification, one of which the employee confirms receipt of by signing. The employee is not obliged to sign the notification of termination, but on the other hand by not signing, the employee does not approve the termination. If the employee does not want to sign the notification of termination, it is a good idea to have a witness who can verify that the notification was presented. The notification of termination itself is valid without a witness’s or employee’s signature but proving it in such a case may be problematic.
As an employer, you must inform the TE Office without delay that you have terminated people’s employment if you have terminated at least ten employees’ employment on financial or production grounds. The information must include the number of terminated employees, roles or duties, and the date of termination. If you terminate ten or more employees, you as an employer must inform employees terminated on production and financial grounds of their right to an employment plan. They have this right under the Act on Public Employment and Business Service.
As an employer, after you terminate employees on financial and production grounds, you are obliged for the next four months to offer work to employees terminated on these grounds. If a terminated employee had been continuously employed for at least 12 years when his or her employment was terminated, you are obliged to rehire him or her during the next six months.
The former employee needs to be seeking work via the TE Office to qualify for rehiring. If you do not offer new work to a former employee who is a client of the TE Office, the termination of employment can be deemed invalid.
Obligation to apply the Act on Co-operation within Undertakings
A company regularly employing at least 20 employees must apply the procedure in the Act on Co-operation within Undertakings when terminating employment. Read more about this Act in the dedicated section for Suomen Yrittäjät members.
Find out more in the section on the Act on Co-operation within Undertakings.